It's good to go shopping when times are flush. After turning in a Q4 and full-year 2014 that broke records, vehicle maker Polaris Industries (NYSE:PII) has opened its checkbook. Last week, the company announced it had inked an agreement to purchase Asian specialty-vehicle manufacturer Hammerhead. Let's step into the showroom to take a look at Polaris' latest buy.
Heading into Asia
Hammerhead makes and sells go-karts and light utility vehicles (gas-powered and electric). Its main factory is located in Shanghai, and it operates a second in the U.S., near Dallas. Its products are sold in Asia, North America, and Europe.
It's not a publicly traded company, so it hasn't released its financial results or unit sales figures. Neither party is providing details of the transaction.
In the press release announcing the news, Polaris CEO Scott Wine was quoted as saying that owning Hammerhead "provides Polaris with a unique opportunity to expand both our international manufacturing footprint and our armada of off-road products."
Wine also stated that he was looking forward to "establish[ing] Polaris' operational footprint in China." The emphasis on manufacturing seems to indicate that the Shanghai plant was one of the main reasons for the acquisition (it also helps that Polaris' China subsidiary is based nearby).
Although Polaris sells actively in markets abroad, it could probably benefit from a stronger international presence. In 2014, roughly 15% of its sales came from outside of North America, a similar percentage to the two preceding fiscal years.
It was only late last year that the company opened its first factory abroad, specifically in Opole, Poland. But since European economic growth has been anemic lately, Asia has better potential for the future of international sales. Owning a factory in the heart of China positions the company to take good advantage of this.
Fill 'er up
Asia can be a nice revenue and profitability booster if Polaris utilizes the Hammerhead assets well. This would keep the American company's good momentum going; Q4's net income of $135 million was 25% higher than 2013's, on total sales that advanced 18%. Zooming out a bit, the firm has posted double-digit increases in both line items over the past few fiscal years.
As we don't know the financial particulars of the deal, it's hard to say whether the sale price was reasonable. What we can ascertain is that, thanks to Polaris' strong fundamental performance, it's got a growing pile of free cash flow with which to fund acquisitions (not to mention a 10% increase in its quarterly dividend to $0.53 per share, announced in January). For 2014, free cash flow amounted to $355 million, a robust 48% higher year over year.
Dipping into this war chest to effectively buy growth through acquisitions -- Hammerhead is Polaris' second in this young year, following last month's purchase of the electric motorcycle business of Brammo Motorcycles -- feels like smart utilization of cash.
As such, from what we know, we can consider this latest buy a good move for the company, helping it continue to (sorry!) motor ahead.